‘The ultimate cause of the global financial crisis is the psychology of the real estate bubble,’ Robert J. Shiller said, ‘but it appears that most people have not taken this view to heart.’1
Robert J. Shiller, the renowned professor of economics at Yale University, as well as the expert on U.S. housing markets, noted in the book ‘The Subprime Solution, How Today’s Global Financial Crisis Happened, and what to Do About it’ that, the core of the problem is the irrational public enthusiasm for housing investment.2
How the crisis spread? Shiller attributed it to the chains of events which real estate speculators, mortgage brokers, underwriters, ratings agencies, borrowers, appraisers and investment bankers, all played their roles in. With a social contagion of belief that it is real ‘boom’ rather than ‘bubble’, an optimistic view of the market is widespread. The ‘great intelligence’, at that time, Alan Greenspan, in his 2007 book The Age of Turbulence said that, ‘We were facing not a bubble but froth—lots of small local bubbles never grew to a scale that could overall threaten the economy.’3 Shiller borrowed a term from economic theorists Sushil Bikhchandani that ‘Information Cascades’ occurs when the real intelligent people (the bubble foreseer) disregard their independent collected information and ‘act instead the general information’, with the mass belief. 4 Shiller also pointed that, land speculation went far back into history (in 1930s), but the increase of the focus on real estate market can be related to the ‘aftereffects’ of the stock market boom of 1990s. A transformation of people’s thinking is, in 2000, they expect to make a lot of money investing. They trust ‘smart investors ever more.’ 5 The deepest cause of the bubble, may lie in ourselves,6 Shiller wisely pointed it out, and it maybe the reason that we can hardly unravel it.
In the book, Shiller first used a lot of historic cases of US housing, trying to compare and contrast the causes of the contemporary subprime crisis. While in the latter part, he separates the solutions to the serious crisis: Short-term bailout and Long term regulations. His short-term solutions amount to merely a suggestion that we somehow muddle through with some bailouts as trying to minimize moral hazard. His long-term solutions propose to ‘improve the information infrastructure’. 7In my opinion, these informational substitutes are concrete, but somehow difficult to realize.